Bad dog: When the regulatory watchdog gets captured by big business

On Tuesday, it was Wells Fargo’s turn in the barrel — again — as Chief Executive Tim Sloan was the rhetorical piñata for members of the House Financial Services Committee.

The big bank, you will recall, opened millions of fake accounts for customers while scamming them with unneeded fees and products. Lawmakers of both parties were skeptical that the bank had made progress in moving beyond its scandals.

But why should it, really? Although Wells settled allegations for $1 billion, its net income was more than $6 billion last year alone. Cost of doing business. The Office of the Comptroller of the Currency, a key regulator, expressed “disappointment” in Wells Fargo. But what is it going to do? Not much with Donald Trump in the White House.

Last year, before Democrats took control of the House, Trump signed a Republican bill that began rolling back regulations on banks that had been put in place after the abuses that caused the Great Recession. He said the big banks deserve even more “relief” from regulators.

The administration has worked hard to weaken the Consumer Financial Protection Bureau, an agency created to police scams that were rampant before the 2008 banking crisis. As a result, enforcement activity has fallen dramatically.

This is happening across the intersection of big business and government, where risk of “regulatory capture” is always high. That’s when the regulated industries use their lobbying power to defang the agencies intended to protect the public. Sometimes it happens because the industry itself has the most expertise compared to the staff of the underfunded regulator.

Trump also rescinded an Obama administration rule that generally banned lobbyists for two years from going to work for regulators they had sought to influence. The potential conflicts of interest now are enormous.

Most timely is the relationship between the FAA and Boeing. The agency — which has lacked a permanent leader for more than a year — finally made the United States the last major nation to ground the 737 MAX after two suspicious crashes.

Since 2009, the FAA has allowed aerospace companies such as Boeing to use their employees to certify the safety of their products. Before that, the agency delegated that important task to outside experts.

Jim Hall, former head of the National Transportation Safety Board, told The New York Times, “It’s a very cozy relationship. The manufacturer essentially becomes both the manufacturer and the regulator, because of the lack of the ability of government to do the job.”

Boeing, which is also a major defense contractor, spent $15 million on lobbying last year, according to the Center for Responsive Politics. Former Boeing executive Patrick Shanahan is acting Secretary of Defense.

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A philosophical argument on the proper role of regulation stretches back decades.

While few would question the good of the Pure Food and Drug Act of 1906, conservatives and big business bridled as regulations increased in the 1960s and 1970s.

He wrote, “The basic functions of government are to defend the nation against foreign enemies, to prevent coercion of some individuals by others within the country, to provide a means of deciding on our rules, and to adjudicate disputes.”

Although this pure vision of conservatism hasn’t been achieved, it has long guided the political right. Under this belief, President Richard Nixon was an apostate for signing the Clean Air and Clean Water acts and establishing the EPA.

Obviously not all regulations are good or effective. But it’s a myth that they kill jobs or generally hurt the economy — unless one wants the kind of job creation found on the toxic beaches of ship-breaking operations in developing countries.

The conservative presidencies of Reagan, both Bushes and now Trump have failed to deliver the tiny government with minimal regulations sought by conservative dogma. The era of big government is not over, contrary to what Bill Clinton opportunistically claimed. The government will not become small enough to drown in a bathtub, as right-wing activist Grover Norquist fantasized.

Why?

The United States is too populous and complex to return to a Coolidge-era simplicity (which helped set the table for the Great Depression, anyway).

Market failures happen — think deadly pollution or the recent banking crisis, neither of which could be addressed by market forces alone. People demand that government act as a large counterweight for the common good, to balance the self-serving force of big business.

The conservative response has been to encourage regulatory capture or wrecking agencies from the inside, as is happening with the EPA. This isn’t all done in bad faith. Many conservatives would argue these are necessary measures to prevent an overbearing regulatory state from stifling free enterprise.

Since the Carter administration, the centrist and liberal response has been attempts as “smart regulation” combined with deregulation. Remember, it was Jimmy Carter who deregulated airlines and railroads, Clinton signed the repeal of Glass-Steagall’s banking rules.

Barack Obama’s rule-making was modest and supported by science to make a dent in climate change and pollution, as well as encourage workplace fairness. This is hardly the Bolsheviks storming the Winter Palace.

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But an impatient younger generation of Democrats is unapologetically left-wing. Whether their candidates can make the case for tougher regulation will be a touchstone of the 2020 election.